New opporunity for auto component firms

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Auto and auto component firms are on the radar. Auto companies are buzzing after their monthly sales figures. In first month of FY24, wholesale numbers were good but become tepid on the retail level. Meanwhile, future dynamics are changing which can create some opportunities for auto ancillary companies.

PV sales grew 13% (YoY) in April this year from 2.93 lakh to 3.31 lakh units, but there was only a 3.5% (YoY) increase on a retail level. Last year’s pent-up demand is fading and auto companies have raised their prices due to the transition towards BS6 and higher raw material prices.

Earnings results of companies like Maruti, and Bajaj Auto depicted softness volumes. Maruti has a good order book which will provide revenue visibility going ahead and for Bajaj Auto recovery in rural demand is a major factor. Still, brokerages have given a buy rating on Maruti but few of them have revised down target price.

Recently, Nomura released a report on the auto sector which depicted important insights. It stated that inquiries/ footfalls, especially for the small car segment, have softened and there is not much recovery in two-wheeler demand. 

Forward outlook

Let’s look at the whole dynamics. Car prices have increased, the economy is not doing great, rural demand is yet to recover and pent-up demand has faded. At the same time, it seems, inflation and interest rates appear to have peaked. However, common folks (consumers) realise such changes with a lag. So till then, auto companies may face some tough times. One saving grace is strong order books that can provide revenue visibility. Crisil expects PV sales to grow at 9-10% in FY24.

Coming to the production side, semi-conductor issues are still prevalent which are impacting the production. So as a result, Maruti is looking to diversify their supply chain to create resiliency. The company is looking to reduce dependency on semi-conductor. It is highly likely that other companies would also do the same. 

Strategy for auto ancillary companies

This is a threat as well as an opportunity for auto ancillary companies. These two changes by OEMs will lead to changes in the product mix involved in making vehicles. So, accurately tracking such changes and modifying their products in timely manner will generate a strong competitive advantage for an auto component company. 

This is not easy but if properly executed the company can differentiate itself which will lead to two strategic advantages.

1) It will lead the learning curve.

 2) Switching cost for their consumers (OEMs) will increase which in turn help with bargaining power for auto component firms which is generally lower against big auto OEMs.